New Isa limit and pensions bombshells planned?

While the Government lectures hard-up Britons to save more for their old age, there's concern Treasury officials are looking into new ways of taxing Isas and pensions.

Just how far any changes might stretch are uncertain. But officials are looking, for starters, on limiting the amount that can be held in tax-free ISAs - and how much cash can be taken as a pension lump sum.

Pensions vs ISAs

The news was greeted with disdain from broker Interactive Investor. Its investment head, Rebeca O'Keeffe, told the Telegraph "it would be completely insane to mess with ISAs. Until now they have avoided the tinkering that seems to happen every year with pensions. ISAs have cut a steady path. There are none of the complications that surround pensions."

British savers are increasingly opting for ISAs over pensions. In 2011-2012, the Office of National Statistics reported that savers stuck £14.3bn into pensions, but £15.8bn into ISA stocks and shares. This was the first time that ISA saving had surged ahead of pension pot savings.

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Pensions continue to attract criticism for their complexity, cost and (part-consequently) dismal returns. Given the popularity of ISAs, it will worry many that the Government are thought to be looking to cap the amount that can be held in them (currently you can hold up to £11,250 a year).

Particularly those that have risen in value, thanks to compounding and careful, savvy investment nous. It's thought there is a growing amount of Britons with at least £100,000 in ISA savings. Equally as concerning are rumours that Treasury officials are looking at slashing how much pension savers can take from their pension pot as a cash lump sum, currently 25%.

Already a tax-free lump-sum payment of £36,000 has been put forward by the Pensions Policy Institute. Either way, the news is a blow to savers, particularly those who work in the private sector, wholly reliant on the performance of the stock market and ISA and pension pots to secure them an old age income.

Flat rate

Public sector workers enjoy rather more guarantees; indeed, the number of British private sector workers saving for a company pension are now at their lowest level since 1953, according to ONS data.

What is needed is more encouragement for pension and ISA savings, not more tinkering around the edges. How about a flat 30% tax relief rate for starters, boosting 20% level taxpayers while keeping pension saving still tax-efficient for higher rate payers?

The Treasury were contacted for a response for this story but none was made.

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